Adam Smith’s Enemy Was the East India Company, Not the Tariff of 1789

This week, Scott Lincicome marked the 250th anniversary of The Wealth of Nations by recruiting Adam Smith into the free-trade lobby’s war on American tariffs. It’s a clever conscription, but it depends on erasing the most important fact about Smith’s world: when Smith attacked “mercantilism,” he was attacking a system America’s founders also rejected — and replaced with something Smith never imagined.

In Smith’s Britain, trade protection and monopoly were the same policy. The Crown and Parliament didn’t merely tax imports; they chartered exclusive trading corporations and handed them entire continents. The East India Company held a legal monopoly on Asian trade, backed by its own army. The Hudson’s Bay Company owned the commerce of a third of North America by royal grant. The Navigation Acts dictated that colonial goods move in British ships to British ports for the benefit of British middlemen. When Smith warned of merchants conspiring “against the publick,” he was describing men who could enforce their conspiracy with the power of the state — because the state had given them an exclusive charter to do it.

Americans knew this system intimately. We were its victims. The Boston Tea Party wasn’t a protest against a tariff — the Tea Act actually lowered the duty on East India Company tea. It was a protest against a chartered monopoly being granted privileged access to the American market over colonial merchants. The Revolution that began the same year Smith published was, in real part, a revolt against exactly the corporate-state fusion Smith was condemning in print.

So what did the founders build? Not Smith’s nightmare — its antidote. The Constitution created the largest internal free-trade zone in human history: no state tariffs, no chartered national trading monopolies, no exclusive franchises over commerce, open entry for any American into any trade. And around that continental common market, they placed a protective tariff. The second statute ever enacted by Congress — signed July 4, 1789 — declared in its preamble that duties were necessary for “the encouragement and protection of manufactures.” Hamilton’s Report on Manufactures made the logic explicit; Washington wore a suit of Hartford broadcloth to his inauguration to make it visible. The American System was internal free trade plus external protection, with monopoly banished from both.

That distinction dissolves Lincicome’s whole argument. A tariff in Smith’s Britain protected a chartered monopolist or designated guild from any competition at all. A tariff in the American republic protects a market — one in which dozens of domestic firms, in different states, fight each other for every customer. Smith feared the tariff because of what stood behind it. In America, nothing stood behind it but open competition among Americans.

The founders’ successors understood the pairing perfectly. In 1890, the very same Republican Congress passed both the McKinley Tariff — the most protective in American history to that date — and the Sherman Antitrust Act, the foundation of all American competition law. These were not contradictory impulses awkwardly cohabiting in one session. They were the two halves of a single policy, championed by two Ohio Republicans who were allies, not adversaries: reserve the American market for American producers, and police that market so that no producer could ever capture it. The tariff wall and the antitrust cop went up together, because the men who built the American System understood that each made the other work.

Which brings us to the most revealing sleight of hand in Lincicome’s essay. Quoting Smith’s famous warning that people of the same trade seldom meet “but the conversation ends in a conspiracy against the publick,” Lincicome rushes to assure readers that Smith “isn’t here calling for government antitrust cops.” Of course Cato reads it that way. The libertarian movement has spent half a century opposing antitrust enforcement, so Smith must be conscripted against the trustbusters too. But Smith’s alarm at producer combination was genuine and central to his book — and the American answer to that alarm was the Sherman Act, not a shrug. It was the same Congress that passed the McKinley Tariff Act that codified America’s landmark antitrust law. Strip away both the tariff and the antitrust cop, as Cato would, and you are left with no answer at all to the conspiracies Smith described. You have simply invited them to organize at global scale.

And organize globally they did — a fact Lincicome’s essay never once acknowledges. The international cartel has been the dominant form of the “conspiracy against the publick” for well over a century. The interwar International Steel Cartel carved up world output by national quota. The Phoebus cartel fixed the lifespan of every lightbulb on earth. The vitamins cartel of the 1990s rigged prices on every continent — and was broken only because the United States still employed the antitrust cops Cato disdains. OPEC conspires against the public in press releases. There is no world government to police a world market, and there never will be. Worse, free trade itself drives the consolidation: as tariff walls fall, firms merge across borders in pursuit of global scale, until each nation is left holding a single “national champion” that it will inevitably defend rather than discipline. No European government will move against Airbus; no Asian government will move against its chaebol or keiretsu; Beijing’s entire industrial model is to consolidate a champion, subsidize it, and aim it at world markets. A nation that surrenders its tariff is left depending on foreign governments to police foreign cartels on its behalf — which is to say, left depending on nothing.

That is the deepest case for the protective tariff: it is competition policy. The home market is the only market any nation can actually keep competitive — the only one where its antitrust writ runs, where entry is open to its own citizens, and where rivalry among many producers can be guaranteed rather than hoped for. Without a protected home market, there is no standing up to global cartels; there is only joining the scramble to crown a champion of one’s own.

Lincicome’s second move is to treat tariff lobbying as corruption per se — a “conspiracy against the publick” relocated to Washington. But notice what he concedes along the way: that the right to petition government for trade protection is “certainly defensible” on First Amendment grounds and consistent with Smith’s own standard of “liberty and justice.” He’s right, and the concession is fatal. Petitioning elected representatives is not a market failure to be engineered away. It is self-government.

Smith himself told us what to do with producer petitions: examine them “long and carefully,” with “the most scrupulous” and “most suspicious attention.” That is a description of a congressional tariff hearing. For a century and a half, the great Ways and Means hearings did precisely that. The hearings preceding the 1909, 1922, and 1930 tariff acts ran to tens of thousands of printed pages — every industry making its case in public, under oath, on the record, with importers, downstream users, and consumer advocates there to rebut them, and elected representatives answerable to voters making the final call. Wool growers argued with woolen mills; steelmakers argued with steel-using machinists; sugar refiners argued with cane growers. The balancing of producer and consumer interests wasn’t suppressed by the process — it was the process. No institution in American history better embodied Smith’s demand for suspicious public scrutiny than the open tariff hearing.

What replaced it? Lincicome applauds the 1934 Reciprocal Trade Agreements Act for taking tariffs away from Congress — and then spends half his essay complaining that the resulting executive-branch system is “opaque and byzantine,” captured by insiders, and immune from public scrutiny. He’s describing the world his side built. Tariff-making by published hearing and floor vote gave way to tariff-unmaking by closed-door negotiation in Geneva, where concessions were traded sector for sector with no transcript and no roll call. If opacity is the disease, the cure is not less congressional tariff-making but more: restore rate-setting to the most transparent, most accountable, most petitioned branch we have. That’s not a corruption of the founders’ design. It is the founders’ design.

(As for Smoot-Hawley “deepening” the Depression: Douglas Irwin — Lincicome’s own preferred authority — has concluded that the tariff’s macroeconomic effect was modest and that monetary collapse, not duties on a small slice of GDP, drove the catastrophe. The legend survives because it’s useful, not because it’s true.)

Finally, the old worry that a tariff breeds monopoly at home is weaker today than at any moment in economic history, because capital is more mobile than it has ever been. In Smith’s era, corporate charters were not easy to come by, and capital was far less mobile. Today, setting up an affiliate is trivially easy. Every great automaking nation has taken steps  — and in every one of them, the world’s automakers responded not by cartelizing but by investing. Europe’s car tariff brought American and Japanese plants to the continent. America’s protection of its auto market brought Honda to Ohio in 1982, then Toyota, BMW, Mercedes, Hyundai, and the rest — until “foreign” nameplates employed hundreds of thousands of Americans building cars in Indiana, Alabama, and South Carolina. The tariff didn’t shelter a monopolist; it multiplied the competitors inside the home market while ensuring the production, the payrolls, and the know-how stayed here. Protection plus open entry plus mobile capital yields more domestic competition, not less — while the alternative, a single open world market, yields exactly the consolidation into a handful of global giants that we have watched unfold in industry after industry. Smith, who never saw a multinational firm jump a tariff wall with a greenfield factory, can be forgiven for not anticipating it. Lincicome cannot.

Smith was a genius, and much of his book remains essential. But he wrote against a Britain of royal monopolies, chartered companies, and colonial subjugation. The Americans who declared independence the year his book appeared went on to build the one thing his framework never contemplated: a continental republic that fused internal free trade with external protection, banished official monopoly, and — when private combination threatened the home market — sent in the antitrust cops Cato still pretends Smith never wanted. Behind that wall, America became the greatest manufacturing nation the world has ever known. On this 250th anniversary, that’s the legacy worth defending. Not the caricature in which every American producer who petitions his own elected representatives is a conspirator, every closed-door deal in Geneva is the public interest, and the global cartels conspiring against the public this very day go politely unmentioned.